Bear Pennant (Bearish Continuation)
Introduction | Main Characteristics | Example |
Pennants are amongst the most commonly witnessed continuation patterns. A pennant is similar to a flag and represents a brief pause in a vigorous trend. These patterns typically form exactly in the middle of a rising or declining trend and, as such, are said to "fly at half-mast".
The formation of a Pennant typically takes 1-12 weeks, although most chartists prefer formation over a period of 1-4 weeks, and not much longer. Price action within a pennant is bounded by two converging trendlines and the overall appearance of the pattern is similar to that of a small symmetrical triangle.
Legitimate pennants are always continuation patterns and only rarely does a pattern that resembles a pennant instigate a trend reversal. In order to avoid the pitfalls of wrongly picking a pattern as a pennant, one must adhere to the guideline that a sharp move into the pattern is essential to its legitimacy. A lethargic preceding move would suggest that the pattern is not to be recognized as a pennant.
Pennants form during rising trends (Bull Pennants) as well as during declining trends (Bear Pennants). The action that precedes a bear pennant is typically characterized by a sharp, virtually cascading, move that is often accompanied by heavy trading volume. The near-vertical price drop into the pennant is referred to as its flagpole.
The occurrence of the pennant provides a temporary respite from the bout of selling. It is depictive of a period within which the trend is "catching its breath" and building vigor for the next phase. The trading activity witnessed during development of a pennant is usually characterized by tepidness, that is until the pattern is complete.
In the case of the bear pennant, a breakout below the lower pennant line completes the pattern and triggers the continuation of the descent. This breakout typically brings with it a flood of activity and price careens towards the target.
The measurement of the target for a pennant is rather straight-forward. The trader measures the length of the flagpole - the distance from the point at which the descent into the pennant began up to the low point of the pennant - and projects that arithmetic distance (a percentage measurement is often implemented in the case of a bear pennant) from the breakout point to arrive at a target. The target is usually accomplished fairly quickly.
EWJ formed a peak at 15.45 in early-May and started to descend rapidly on heavy volume through the middle of that month. The sharp decline was temporarily arrested at 13.65 in late-May. Price then traded sideways between two converging trendlines for the next 2 weeks. It was immediately apparent that energy was built for an imminent sharp move.
Volume dried up during this brief period of consolidation and then, in early-June, the lower line of what was now seen as a completed pennant was broken (at 13.75) triggering a resumption of the downtrend. The release of pressure from the pennant was so fierce as to have left a gap on the breakout and then another one on the way lower towards the target.
This second leg of the selloff was accompanied by explosive trading volume as frantic investors headed for the exits. The decline only halted upon a nearing of the pattern's target of 12.16. The security only marginally failed to meet that target in the end; eventually coming within 0.02 pts of it, which for all practical purposes is close enough to have booked profits.
The target was calculated using a percentage measurement (usually the preferred method in the case of bearish patterns) of the flagpole. The "length" of the flagpole was found to be 11.6%; the arithmetic length of the flagpole (15.45-13.65 = 1.80) was divided by the level of the origin of the decline (15.45) in order to arrive at the percentage measurement. This distance was then projected from the breakout point [13.75 - (11.16%*13.75)], to arrive at the target of 12.16.
